There is no merit in holding commodities funds in the current environment, according to Andy Merricks (pictured)
, who says they offer little in the way of diversification benefits.
The majority of commodities and mining funds have had a torrid time recently as headwinds such as falling prices, a slowdown in the emerging markets and the strengthening of the US dollar have all caused sentiment to turn against the asset class.
For example, over the last 12 months the FTSE All Share Mining index has lost money while the wider FTSE All Share has returned more than 20 per cent.
Performance of indices over 1yr
Source: FE Analytics
Despite the fact investors in natural resources funds have lost or made little money over the past few years, some advisers say they should retain their exposure for diversification purposes.
However Merricks, who is head of investments at Skerritts Wealth Management, says that commodities and natural resources funds do little to balance a portfolio and will only lose investors more money.
"I don’t get the diversification argument," Merricks said. "A lot of the time you would be diversifying for diversification's sake because when you look at the likes of BlackRock Gold & General
or JPM Natural Resources
, they are just equity funds."
"I think that is the mistake that many people have made, as they saw the name of the fund and thought it may balance out their portfolio, when in reality all they were doing was getting more equities."
"The way I look at it is: have a blank piece of paper and write down where you want to invest. If commodities aren’t on that list, then what is the point of still holding on to them?"
"Do commodities look a more compelling investment than, say, biotech, European or smaller companies funds? I think there are better ideas out there," he added.
According to FE Analytics
, JPM Natural Resources, Investec Enhanced Natural Resources
and BlackRock Gold & General – which is run by FE Alpha Manager Evy Hambro
– have experienced double-digit losses over three years, with Hambro’s portfolio losing an eye-watering 49 per cent.
Performance of funds over 3yrs
Source: FE Analytics
Merricks says there are number of reasons why investors should now be selling out of their exposure to the asset class, with the main one being the long-term economic shift in the emerging markets.
"There has been a change in dynamic," he said.
"China in particular has had a decade of stockpiling resources and of sorting out its own supplies. However, you can only build 20-odd cities or airports at once. The problem, like with anything, is that production can get ahead of itself," he added.
He says that a lot of the mines, especially the ones producing gold, face a difficult future as they will be running at a loss with the price of the precious metal and other commodities at such low levels and could be forced to close in the future.
Another headwind facing the asset class is the value of the US dollar. Merricks says that although the dollar has weakened recently, as the US economy strengthens, so too will its currency, which will put further downward pressure on commodity producers.
"A stronger US dollar certainly won’t help," he said.
"You can see the correlation between a weakening dollar over the last decade and rising commodity prices. It has to have a negative effect if the dollar were to strengthen and that is again why commodities really aren’t for us," he added.
Despite his reservations surrounding natural resources funds, Merricks says that one of the biggest mistakes investors can make is to hold on to something that has lost them money in the hope that it will rebound and recover its losses.
Instead he says investors should just cut their losses and reinvest somewhere else.
"The people who are saying you should still hold them are the same people who have held on to commodity funds for too long. When they say 'I think', what they actually mean is 'I hope'," Merricks continued.
"It can be the case that they are too proud to admit they have made a mistake. I can’t really see a point in holding commodities funds, especially when you think of the longer term structural shift in the emerging markets," he added.
Merricks say that it isn’t necessarily the end for natural resources funds and there could be a point when they become attractive again, but for the foreseeable future they do not make a good investment.
"You can never write them off, as for instance we are investing into European funds again for the first time in a long time. Then there are biotech funds, which for the last 10 years we haven’t touched with a barge pole, but now we are back into them."
"There will be a time when commodities funds are back in favour, but it is not now," he added.